Thursday, April 17, 2008

Understated spreads?

The WSJ has an interesting, slightly scary article about LIBOR. It includes a nice chart showing the three waves of the financial crisis as indicated by the TED spread, and the failure of even the Fed’s huge interventions to bring things back to normal:

But the big news in the WSJ piece is that LIBOR may be higher than reported, and the spread even worse than it looks, because banks aren’t honestly reporting the interest rates they have to pay:

The concern: Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates.